Commercial Arbitration vs. Mediation

Commercial Arbitration vs. Mediation

Over the years, I have been heavily involved in resolving complicated and cross-border legal and contractual disputes within the international construction, manufacturing, infrastructure, energy, life sciences and med tech industries. I have gained extensive knowledge in handling and managing my employers’ or clients’ disputes both in domestic and international arbitrations and other alternative dispute resolutions around the world. Based on my experience, I have given a lot of thought to finding a way to resolve disputes in long-term contracts (i.e. project contracts, long-term sales, distribution and licensing contracts and cooperation contracts). In this article, I share some of the key ideas I have discovered as possible solutions to this issue.

Litigation/arbitration vs mediation

When a commercial dispute is to be resolved, the traditional route is to engage into court procedures or arbitration. There are however several disadvantages to entering into a court procedure. Confidential information and trade secrets are often publicly disclosed due to local laws or regulations. The lack of industry specific knowledge amongst judges can jeopardise the achievement of an acceptable or reasonable outcome. It can also take years until there is a binding award due to the appeal rights and the time this process may take.
Arbitration, on the other hand, enables the parties to agree on confidentiality. It is also an advantage that the parties can select arbitrators whom possess the required industry-specific knowledge. There is a very limited possibility to appeal a case, eliminating concerns about long and drawn out procedures. Even if the cost aspect is raised as an argument against the use of arbitration, I question if there is any major cost difference between a litigation and arbitration, when taking the appeal right in a litigation into consideration.
In recent years, mediation has provided a new alternative to resolve commercial disputes. It has proven to be successful in countries based on the Anglo-American legal system, particularly in England and the US. Mediation offers an independent party that acts as the intermediary in order to find a solution that can be accepted by both parties. It is often an excellent way to resolve a dispute and at the same time preserve a business relationship. It will also, amongst other advantages, save process time, costs and loss of prestige.
“Disputes do in most cases lead to trust and cooperation between two contract parties being hampered. However, based on my experience there is a major opportunity to mitigate this problem if it is addressed in the correct way in the actual contract.”

Dispute resolution in long term or complex contracts

Disputes in commercial situations where there is a contractual relationship that preferably should last for a long period (e.g. in big construction and installations contracts as well as in sales, licencing, distribution contracts), need to be resolved in a way that preserves the parties ability to continue performing the concerned contract without undue delays and costs despite a dispute.
One way to achieve this is to introduce a dispute resolution process that applies throughout the contract. This could be solved by the parties agreeing on an independent person(s) already in the contract, who will act as the dispute resolution resource that can be called in when needed during the execution of a contract. It is recommended to stipulate that the appointed adjudicator(s) are scheduled to have a dispute resolution session every third or sixth month during the contract period. At these sessions the aim should be to resolve the disputes that have emerged since the last session and thereby try to ensure that only major issues, if any, are referred to a final dispute resolution when the contract is completed. This process should focus on removing obstacles/disputes that might unnecessary delay the completion of a contract.
Should the appointed adjudicator be prevented from executing his services or die, then the parties should also secure that the contract procure for that a mutually agreed independent institution (e.g. ICC, Stockholm Chamber of Commerce, LCIA, etc.) should appoint a new adjudicator. Disputes that cannot be resolved by the adjudicator should, of course, be resolved by arbitration, but preferably, subject to time limitation issues, at the end of the contract period. The adjudicator’s aim should be to actively resolve any time or performance delaying issues.

Conclusion

Disputes do in most cases lead to trust and cooperation between two contract parties being hampered. However, based on my experience there is a major opportunity to mitigate this problem if it is addressed in the correct way in the actual contract. As always, when drafting a contract efforts need to be made to identify and foresee the likely risks for dispute as early as possible. It should create a dispute resolution process in the contract that assures a resolution to any disputes as smooth as possible throughout the project/contract so that the impact is as little as possible. In the end, as the business community active in large and complex contracts are relatively small, it is a matter of safeguarding trust, fairness and ensuring a good business climate between the involved parties so that this kind of project can be performed smoothly and successfully both now and in the future.

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